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First, the direct and indirect effects of protection on capital inflow are presented. Secondly, the principles for taxing foreign capital are reviewed. Then, tariffs are shown in some cases to be second‐best taxes or subsidies on foreign capital. Finally, it is shown that transfer pricing by vertically integrated multinationals has implications for tax and tariff policies.

First, the direct and indirect effects of protection on capital inflow are presented. Secondly, the principles for taxing foreign capital are reviewed. Then, tariffs are shown in some cases to be second‐best taxes or subsidies on foreign capital. Finally, it is shown that transfer pricing by vertically integrated multinationals has implications for tax and tariff policies.